Privilege in Investigations: No More Shackles?

The High Court in London recently decided for the first time on the availability of litigation privilege in criminal investigations conducted by the UK Serious Fraud Office (the “SFO”). The decision could significantly limit the ambit of litigation privilege in cross-border investigations involving UK regulators, which will have implications for financial institutions and multinational corporations with operations in Hong Kong (The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB)).

Decision at a Glance

In 2011, Eurasian Natural Resources Corporation (“ENRC”) agreed with the SFO to engage external counsel to perform a “self-reporting” investigation, regarding allegations of fraud, bribery and corruption in its overseas business operations. In April 2013, the SFO terminated its dialogue with ENRC and commenced its own formal investigation instead.

The SFO applied to the Court for a declaration that documents generated during the self-reporting investigation were not privileged. These included (1) external counsel’s notes of individuals’ evidence, (2) forensic accountants’ books and records which identified controls and systems weaknesses and potential improvements, (3) factual evidence presented by external counsel to ENRC’s management, and (4) documents sent by ENRC’s external counsel to the SFO. ENRC mainly relied on litigation privilege for category 1, 2 and 4 documents, and legal advice privilege for category 3 documents.

Andrews J rejected all claims to litigation privilege, because criminal proceedings were not reasonably contemplated at the time they were created despite the existence of the investigation, and also on the basis that the documents were not created for the dominant purpose of obtaining legal advice pertaining to the conduct of litigation. Only the claim for legal advice privilege for category 3 documents succeeded.

When is litigation reasonably contemplated?

The judgment explored the issue of when adversarial litigation becomes “reasonably in contemplation” for the purpose of litigation privilege. The test is objective, but the court will also consider a party’s actual state of mind. There must be a real prospect of litigation. Where it is neither pending nor threatened, it must be in the active contemplation of a party. A “distinct possibility” or a “general apprehension” of future litigation is insufficient. In this case, ENRC needed to show that it was “aware of circumstances which rendered litigation between itself and the SFO a real likelihood rather a mere possibility”.

Andrews J rejected ENRC’s submission that a criminal investigation by the SFO should be treated as adversarial litigation for the purpose of privilege. Mere contemplation of an investigation is insufficient.

The Judge also set a higher threshold as to when a criminal prosecution is a real likelihood, as compared to the threat of civil proceedings. While there is no inhibition on commencing civil proceedings without foundation except costs sanctions, a criminal prosecution cannot be started “unless and until the prosecutor is satisfied that there is a sufficient evidential basis for prosecution and the public interest test is also met”. This appears to require knowledge on the party claiming privilege that the prosecution has gathered sufficient criminal evidence to justify a prosecution.

Relevance to Hong Kong

Under the lex fori principle, issues of privilege are determined by the laws of the forum. If disclosure is sought in an English court, English law applies regardless of any privilege that may exist under other laws. Financial institutions and multinational corporations which may become subject to investigations by UK regulators should be alert to this approach. Moreover, this stricter approach to litigation privilege might potentially be adopted by the Hong Kong courts.

In Super Worth International Ltd v Commissioner of ICAC [2016] 1 HKLRD 281, the Court of Appeal stated that there is “room for flexibility” in applying the lex fori principle. The Court expressly left open the question as to what approach would be taken where a discovery application is made to assist in foreign proceedings (ie, whether the Court should look beyond the lex fori and consider the laws on privilege of that foreign jurisdiction). This issue could loom large in the context of legal advice privilege, due to the difference in approach between Hong Kong and England, as Hong Kong has parted ways with English law by rejecting the narrow definition of “client” under Three Rivers (No. 5) since the recent case of Citic Pacific (No. 2).

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